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Railroad  Efficiency  and 
Dismemberment 


Testimony  of 

Mr.  J.  Kruttschnitt 

Chairman,  Executive  Committee,  Southern  Pacific  Company 
before  the 


Interstate  Commerce  Commission 
November  22,  1922 


Published  by 

Southern  Pacific  Company 
November  23,  1922 


Railroad  Efficiency  and     j, 
Dismemberment 

Following  statement  was  made  to  the  Interstate  Commerce 
Commission  atWaskington,  November  22, 1922,  by  Mr.  J.  Kruttschnitt, 
Chairman  of  the  Executive  Committee  of  the  Board  of  Directors, 
Southern  Pacific  Company,  at  hearing  on  the  Southern  Pacific 
Company's  application  to  lease  the  Central  Pacific: 


I  ENTERED  the  railroad  service  in  1878  as  engineer  on  con- 
struction of  the  Morgan's  Louisiana  and  Texas  Railroad  and 
Steamship  Company.  From  1878  to  1883, 1  occupied  that  position 
and  the  position  of  General  Roadmaster  and  Assistant  to  the  Chief 
Engineer.  From  1883  to  1885  I  was  Superintendent  of  the  same 
road,  and  also  Assistant  Chief  Engineer.  From  1885  to  1889  I 
was  Assistant  General  Manager  of  what  was  known  as  the  Atlantic 
System  of  the  Southern  Pacific  Company.  In  1889  I  was  made 
General  Manager  of  the  Atlantic  System  and  in  1895,  on  the  death 
of  Mr.  Towne,  who  was  General  Manager  of  the  Pacific  System, 
I  was  made  General  Manager  of  the  entire  Southern  Pacific 
Company,  both  Atlantic  and  Pacific  Systems,  with  headquarters 
at  San  Francisco.  From  1895  to  1904  I  occupied  that  position, 
and  was  also  one'  of  the  Vice-Presidents  of  the  Southern  Pacific 
Company.  From  1901  to  1904  I  was  also  Assistant  to  the  Presi- 
dent. In  1904  I  was  given  charge  of  the  operation,  maintenance 
and  construction  of  both  the  Union  and  Southern  Pacific  Systems, 
with  headquarters  at  Chicago,  with  the  title  of  Director  of  Main- 
tenance and  Operation.  I  occupied  that  position  until  the  unmerg- 
ing  of  the  Southern  and  Union  Pacific,  in  January  1913, 
when  I  was  made  Chairman  of  the  Executive  Committee  of  the 
Board  of  Directors  of  the  Southern  Pacific  Company,  which  posi- 
tion I  now  occupy.  The  Chairman  of  the  Executive  Committee 
is  the  chief  executive  officer  of  the  Company,  who  under  control 
of  the  Executive  Committee  and  Board  of  Directors  has  general 
supervision  and  direction  of  the  Company's  business  in  all  its 
departments  and  over  all  its  officers,  agents  and  employees. 

Development  of  Southern  Pacific  System 

"A  few  words  on  the  history  and  growth  of  what  is  now  the 
Southern  Pacific  System  are  perhaps  necessary  to  a  full  under- 
standing of  its  organization  and  aspirations. 

1 


m 
"The  Central  line  from  San  Francisco  to  Ogden,  built  by  Messrs. 

Huntington,  Stanford,  Crocker  and  Hopkins,  was  placed  in  opera- 
tion in  1869.  It  joined  the  Union  Pacific  at  Ogden,  thereby  mak- 
ing a  continuous  line  from  the  Missouri  River  to  the  Pacific  Coast, 
as  contemplated  by  the  Pacific  Railroad  Acts.  In  1870,  just  a  few 
months  after  the  completion  of  the  Ogden-San  Francisco  Line, 
the  four  men  who  constructed  that  line  purchased  the  line  of  the 
Southern  Pacific  Railroad  Company,  which  then  had  constructed 
80  miles  of  railroad  south  from  near  San  Francisco  to  Gilroy. 
From  that  time  on  extensions  were  made  to  the  Central  Pacific 
Railroad  and  to  the  Southern  Pacific  Railroad  by  the  four  men 
mentioned.  In  1883  the  line  from  California  to  New  Orleans  was 
completed  and  placed  in  operation.  Branches  were  built  and  ex- 
tensions made  from  time  to  time  as  deemed  necessary,  some  in  the 
name  of  the  Central  Pacific  and  others  in  the  name  of  the  Southern 
Pacific  Railroad  Company,  depending  on  which  one  could,  at 
the  time,  the  more  easily  finance  the  desired  addition,  but  the 
management  and  control  were  common  to  both  companies. 
Substantially  all  the  directors  of  both  companies  consisted  of  men 
selected  by  Mr.  Huntington  and  those  associated  with  him  in  the 
control  of  the  two  properties.  There  was  but  one  construction 
company  and  one  superintendent  of  construction,  whose  forces 
worked  interchangeably  upon  both  properties  and  the  equipment 
was  moved  back  and  forth  as  occasion  required.  The  employees 
of  both  companies  were  paid  through  the  same  channel. 

This  went  on  until  1885,  when  the  present  Southern  Pacific 
Company  was  organized  by  Mr.  Huntington  and  his  associates  to 
take  over,  through  leases  for  99  years,  all  of  the  lines  owned  by  the 
Central  Pacific  and  Southern  Pacific  Railroad  Companies,  and 
thence  forth  all  have  been  operated  by  the  present  Southern  Pacific 
Company. 

''Titles  to  extensions  made  and  lines  acquired  since  1885  have 
been  taken  sometimes  in  the  name  of  the  Central  and  sometimes 
in  the  name  of  the  Southern.  For  instance,  the  line  from  Tehama 
north  to  the  Oregon  line,  completed  in  1887,  was  taken  in  the  name 
of  the  Central  Pacific  whereas  the  line  from  Portland  south  to  the 
California  state  line,  known  as  the  Oregon  and  California  Railroad, 
was  taken  in  the  name  of  Oregon  and  California  Railroad 
Company,  then  and  now  owned  by  the  Southern  Pacific.  Thus 
we  see  the  lines  in  Southern  Pacific  and  Central  Pacific  ownership 
so  interwoven  in  both  construction  and  operation  that  it  is  almost 
impossible  to  separate  them  physically.  Any  kind  of  separation 

2 


so  far  suggested  is  really  a  modified  form  of  merger,  but  why 
modify  a  merger  that  has  never  been  a  merger  at  all  but  for  every 
practicable  public  purpose  has  been  one  transportation  machine 
under  one  control  and  one  management  for  over  half  a  century, 
while  the  title  to  some  parts  stands  in  the  name  of  Central  Pacific 
and  to  other  parts  in  the  name  of  Southern  Pacific  ?  The  division 
is  in  name  only.  There  are  'two'  names  but  'only  one  railroad 
system,'  each  part  of  which  is  dependent  for  its  maximum  useful- 
ness upon  some  other  part  or  parts. 

"We  are  applying  to  your  honorable  Commission  for  a  tempo- 
rary lease  of  the  Central  Pacific  until  such  time  as  in  the  exercise 
of  your  authority,  under  the  Transportation  Act,  you  shall  have 
allocated  it  definitely  in  your  permanent  plan  of  consolidation. 
Should  our  application  be  denied  and  the  separation  of  the  Central 
Pacific  be  carried  out  at  once  as  contemplated  in  the  mandate  of 
the  Supreme  Court,  thereby  creating  an  independent  Central 
Pacific,  much  expense  and  inconvenience  to  the  public  through 
changing  existing  routes  and  channels  of  traffic  will  ensue,  which 
will  prove  to  have  been  entirely  unnecessary  if  the  Commission  in 
its  final  consolidation  plan  should  leave  the  existing  relations  of 
Southern  Pacific  and  Central  Pacific  unchanged. 

"An  analogous  case  would  be  that  of  a  house  demolished  be- 
cause it  did  not  conform  to  building  regulations  within  fire  limits. 
Because  of  a  change  in  the  law  thereafter  it  is  found  to  conform 
rigidly  to  them ;  what  possible  purpose  could  be  served  by  insisting 
on  its  demolition  because  of  infraction  of  the  old  law? 

"Therefore,  pending  the  final  decision  of  the  Interstate  Com- 
merce Commission  as  to  the  ultimate  fate  of  the  Central  Pacific, 
two  courses  are  open;  either — 

"(a)  Authorize  a  temporary  lease  such  as  we  ask  for,  or — 

"(b)  Set  up  an  entirely  independent  Central  Pacific. 

"Let  us  consider  which  course  will  better  serve  public  interests. 
In  the  slow  growth  and  development  for  over  50  years  of  Southern 
Pacific  System,  an  efficiency  of  operation,  implying  a  high  excel- 
lence of  service  to  the  public,  attained  by  careful  adjustment  of 
mileage  of  divisions,  location  of  division  terminals  and  freight 
train  terminals,  convenient  to  sources  of  water  and  fuel  supply, 
arrangement  of  train  service,  location  of  shops,  wood  preserving 
plants,  fuel  stations,  all  without  regard  to  corporate  ownership, 
has  created  an  operating  organization  equalled  by  few  and  sur- 
passed by  none.  The  highly  coordinated  train  service  provided  by 
Southern  Pacific  can  be  successfully  operated  only  with  terminals 
functioning  with  great  efficiency.  Through  long  years  of  training 
the  superintendents  and  their  staffs  have  attained  a  high  degree  of 
operating  efficiency  within  the  terminals  along  the  line  and  with 
respect  to  coordinating  operations  with  neighboring  divisions  and 

3 


terminals.  In  assembling  fruit  and  other  freight,  each  terminal 
builds  up  its  trains  so  as  to  minimize  switching  and  insure  prompt 
delivery  at  destination.  A  cooperative  spirit  is  maintained  be- 
tween divisions,  founded  on  the  theory  that  each  is  working  to  a 
common  end.  Each  division  strives  strenuously  to  increase  its  own 
efficiency,  but  is  ready  to  surrender  its  individual  advantage  when- 
ever necessary  to  improve  the  service  as  a  whole.  Should  a  train 
running  over  several  divisions  meet  delay  on  one  division,  con- 
necting divisions  spontaneously  cooperate  to  make  up  lost  time, 
and  are  called  upon  for  explanations  if  they  fail  to  do  so.  Here 
again  the  common  good  of  the  service  is  the  first  consideration. 
Through  a  long  period  of  years  coordinated  train  service  has  grown 
up  concurrently  with  traffic.  Traffic  is  much  heavier  on  some 
routes  than  others.  Some  terminals  have  become  more  important 
than  others.  As  a  consequence  the  various  lines  and  terminals 
have  capacities  proportioned  to  their  needs,  including  sidings  and 
engine  houses,  car  repair  yards  and  other  facilities  that  must  ex- 
pand with  volume  of  traffic;  important  pieces  of  line  have  been 
double  tracked;  the  operating  divisions,  eleven  in  number  (not  in- 
cluding steamer  division)  have  been  established  with  territories 
and  headquarters  to  best  suit  relations  with  patrons  and  shippers, 
and  effectively  supervise  operations. 

" Train  and  engine  men  and  mechanical  department  employees 
in  numbers  sufficient  to  handle  traffic,  as  now  routed,  have  located 
and  built  their  own  homes  at  terminals.  Crews  and  locomotives, 
and  repair  facilities  are  concentrated  at  important  terminals, 
available  for  use  in  any  direction.  This  supplies  flexible  operating 
conditions. 

"In  the  use  of  equipment,  ownership  is  entirely  disregarded, 
locomotives  and  cars  being  so  distributed  as  to  best  meet  the  re- 
quirements of  a  unified  system.  An  examination  of  a  map  of  the 
Southern  Pacific  System  will  show  that  Central  Pacific  and  other 
system  lines  are  so  interwoven  and  interdependent  as  to  offer  al- 
ternative routes  for  traffic  at  a  very  large  number  of  points,  a 
feature  of  great  public  convenience,  because  in  case  of  accident  or 
damage  to  permanent  way,  by  fire  or  washouts,  detours  are  ready 
at  hand  whereby  currents  of  passenger  and  freight  traffic  can  be 
diverted  and  moved  with  negligible  delay.  Such  abnormal  as  well 
as  normal  movement  of  traffic  requires  the  indiscriminate  use  of 
both  lines  to  complete  delivery  of  freight  at  destination  and  to 
gather  freight  from  origin  and  assemble  it  into  solid  trainloads. 
The  flow  of  traffic  in  the  main  north  and  south  commerce  arteries 
between  California  and  Oregon  and  between  Northern  and  South- 
ern California  requires  the  use,  first  of  Southern  Pacific,  then  of 
Central  Pacific,  and  finally  again  of  Southern  Pacific  lines  to  com- 
plete delivery.  Where  alternative  routes  exist  train  service  has 
been  arranged  regardless  of  ownership  of  rails,  so  as  to  afford  the 
best  service  to  the  public  at  the  lowest  practicable  cost. 

"It  will  thus  be  seen  that  service  now  being  rendered  is  the 
direct  product  in  all  respects  of  the  operation  of  these  lines,  as 


interdependent  parts  of  a  single  system,  for  the  period  of  50  years 
and  of  the  growth  in  facilities  and  operating  methods  which  have 
taken  place  during  that  period. 

"The  unanimity  and  spontaneity  of  the  public's  protests 
against  the  dismemberment  of  a  transportation  system  that  has 
been  built  up  gradually  for  its  use  during  a  period  of  53  years  is 
convincing  proof  of  the  fidelity  of  the  management  of  the  Southern 
Pacific  Lines  to  its  public  obligations.  For  years  it  has  spent 
money  consistently  and  generously  in  the  intensive  development 
of  its  transportation  plant  where  ever  it  could  best  respond  to 
public  needs,  and  the  emphatically  expressed  wish  of  the  public 
to  have  the  system  left  intact,  furnishes  gratifying  evidence  that 
its  patrons  believe  their  interests  and  those  of  the  railroad  that 
faithfully  and  efficiently  serves  them  to  be  identical. 

Joint  Versus  Unified  Use 

"It  has  been  conclusively  shown  that  complete  dismember- 
ment is  impracticable.  In  fact  every  suggestion  for  a  termination 
of  the  existing  unified  operation  contemplates  joint  use  of  certain 
lines  to  a  greater  or  less  degree,  itself  conclusive  evidence  of  the 
interdependence  of  these  lines  and  of  the  reason  why  present  unified 
use  should  be  continued.  Any  species  of  joint  use  is  therefore  a 
mere  makeshift  to*  avoid  the  admitted  evils  of  separation.  If  the 
Commission  denies  this  application,  the  District  Court  has  no 
power  to  authorize  a  continuance  of  such  unified  use  of  'all'  lines. 
The  most  that  it  may  do  is  to  authorize  a  joint  use  of  a  part  of  such 
lines  as  compared  with  the  present  unified  use  of  all  such  lines. 
The  extent  of  such  authority  and  the  extent  to  which  the  interested 
carriers,  independent  of  each  other,  would  care  to  avail  themselves 
of  joint  use  is  involved  in  great  uncertainty.  To  whatever  extent 
joint  use  may  be  employed  it  is  not  an  adequate  substitute  for  the 
existing  unified  use.  Under  present  unified  use  the  freest  use  of 
all  lines,  equipment  and  forces  is  made  for  the  purpose  of  producing 
the  most  efficient  service  at  the  lowest  cost  through  their  operation 
as  a  single  system  under  a  single  management.  Present  efficiency 
of  service  is  primarily  due  to  this  condition,  which  would  be  com- 
pletely destroyed  under  any  form  of  joint  use.  There  would  be 
substituted  either  neutral  management  of  all  jointly  used  proper- 
ties or  management  by  the  owning  company  with  the  other 
admitted  as  a  tenant,  either  with  or  without  neutralization  of 
station  and  certain  other  forces. 

"(A)  To  secure  the  most  efficient  operation  of  any  property 
and  consequently  the  highest  grade  of  service  to  the  public,  requires 
the  loyal,  whole  hearted  and  enthusiastic  work  of  all  concerned, 
from  the  highest  to  the  lowest.  Service  of  this  character  can 
never  be  obtained  without  cultivating  regard  for  the  honor  and 
interest  of  the  company  one  belongs  to  in  the  highest  degree. 
Each  and  every  employee  must  feel  a  personal  pride  and  a  personal 
interest  in  the  welfare  and  success  of  the  property  he  serves  and 


an  equal  pride  and  interest  in  the  opinion  the  public  holds  as  to 
the  character  of  his  company's  service  and  his  co-employees.  Under 
joint,  'free',  and  equal  use  of  a  line  by  two  railroads,  considerations 
of  economy  would  require  that  employees  should  be  joint  to  as 
great  an  extent  as  possible.  In  all  contracts  providing  for  joint 
employees  their  absolute  neutrality  is  of  the  greatest  importance 
and  is  always  most  carefully  guarded.  In  such  conditions  where  a 
man  undertakes  the  impossible — to  serve  two  masters — there  can 
be  no  deep  regard  for  the  honor  and  interests  of  both  as  they 
necessarily  conflict,  enthusiasm  is  stifled  and  there  can  be  no  pro- 
nounced effort  to  improve  service  of  either  one  of  the  joint  users, 
because  he  would  violate  neutrality  and  would  lay  himself  open  to 
a  charge  of  discrimination  in  favor  of  one  user  and  against  the  other 
and  probably  would  incur  dismissal  on  the  demand  of  the  party 
discriminated  against.  In  such  conditions  it  is  absolutely  impos- 
sible to  get  the  best  or  most  efficient  service.  Neutral  manage- 
ment or  neutralization  of  employees,  therefore,  leads  to  inefficiency, 
also  to  lack  of  responsibility  on  the  part  of  both  employees  and 
management.  If,  on  the  other  hand,  joint  line  operations  are  left 
in  the  exclusive  control  of  the  owning  company,  the  tenant  com- 
pany will  be  discriminated  against  and  its  service  will  suffer. 

"(B)  Competitive  joint  use  necessarily  leads  to  wasteful 
duplication  of  train  service,  since  each  user  will  endeavor  to  get 
the  lion's  share  of  the  traffic  by  operating  trains,  both  freight  and 
passenger,  at  those  hours  of  the  day  when  most  attractive  to  the 
public,  whereas  under  unified  operation  trains  are  spaced  through- 
out the  day  affording  both  a  more  economical  and,  on  the  whole, 
more  convenient  service.  All  such  increased  expenses  must 
ultimately  be  born  by  the  public  and  defeat  one  of  the  objects  of 
the  Transportation  Act  to  bring  about  efficient  and  economical 
management  and  reasonable  expenditures. 

"(O  Joint  use  complicates  and  retards  the  making  of  im- 
provements by  requiring  the  concurrence  of  two  parties  where 
the  action  of  one  alone  is  now  required,  a  situation  further  com- 
plicated by  the  fact  that  the  interests  of  the  joint  users  are  not 
always  identical,  but  frequently  conflict. 

"(D)  Except  where  there  was  considerable  advantage  in 
routing  traffic  over  joint  tracks  each  company  would  prefer  to 
hold  its  traffic  on  its  own  lines  so  as  to  retain  full  control  of  its 
service. 

"(E)  Divisional  organizations,  representing  years  of  train- 
ing in  the  handling  of  their  own  affairs  and  in  cooperating  with 
each  other  would  be  broken  up  just  as  extensively  as  in  the  case 
of  complete  separation  of  the  lines. 

"(F)  More  extensive  use  can  be  made  of  equipment  and 
power  under  unified  operation  than  under  independent  operation 
no  matter  what  the  extent  of  joint  use.  As  applying  to  the  present 
situation  this  is  one  of  the  most  serious  results  which  would  follow 
either  complete  separation,  or  a  complete  separation  accomplished 
by  joint  use  of  certain  lines,  which  joint  use  would  in  no  way  cor- 

6 


rect  it.  It  therefore  appears  that  joint  use  so  far  as  it  may  be 
provided  for  by  the  court  will  not  cure  the  extensive  impairment 
of  public  service  created  by  separation  of  the  line. 

Increased  Cost  of  Separate  Operation 

"A  careful  estimate  prepared  by  our  operating  officers  shows 
that  a  separation  of  the  properties,  even  with  extensive  joint  use 
of  tracks  and  terminals,  will  result  in  increased  operating  expenses 
for  the  two  lines  combined  of  approximately  $6,557,000  per  annum. 
All  of  this  money,  which  is  approximately  21  percent  of  the  entire 
net  railway  operating  income  of  the  Pacific  System  for  the  calendar 
year  1921,  would  be  wasted  each  year  during  which  the  separation 
continues. 

"A  careful  estimate  prepared  by  our  operating  officers  also 
shows  that  in  the  event  of  separation  there  would  be  imposed  upon 
the  Southern  Pacific  capital  expenditures,  amounting  to  $2,676,- 
000  mainly  for  enlarged  facilities  to  take  care  of  traffic  now  using 
Central  Pacific  tracks,  while  in  order  to  make  good  its  equipment 
deficiencies  Central  Pacific  would  be  required  to  spend  $1,840,000 
for  passenger  locomotives  and  cars,  $3,250,000  for  freight  loco- 
motives, $10,000,000  for  freight  cars,  to  which  expenditures  should 
be  added  other  scattering  capital  expenditures,  making  a  total 
for  the  Central  Pacific  of  $17,966,000  or  for  both  lines  of  $20,642,- 
000.  These  capital  expenditures  would  be  necessary  in  order  to 
permit  these  companies  to  take  care  of  the  same  volume  of  busi- 
ness now  being  handled,  all  of  which  would  be  avoided  by  con- 
tinued unified  control.  It  is  difficult  to  form  an  adequate  conception 
of  the  magnitude  of  these  sums,  but  if  the  expenditure  of  $6,- 
557,000  annually  in  operating  expenses  can  be  avoided  it  would 
purchase  3640  fifty-ton  box  cars  or  94  of  the  heaviest  type  of 
freight  locomotives ;  would  pay  for  a  second  track  in  fairly  difficult 
country  for  130  miles.  The  $20,642,000  of  capital  expenditures 
that  might  be  avoided  is  two-thirds  of  the  average  yearly  amount 
spent  on  the  entire  Southern  Pacific  System  for  the  past  21J^ 
years. 

Central  Pacific  Without  Credit 

" Whether  unified  control  continues  or  ceases,  capital  expen- 
ditures should  be  made  on  the  Central  Pacific  to  provide  increased 
facilities  for  the  handling  of  traffic  both  as  to  second  tracks  and 
facilities  at  important  traffic  centers. 

"Litigation  of  the  past  nine  years  has  so  clouded  the  title  of 
Southern  Pacific  to  Central  Pacific  that  improvements  of  all  kinds 
have  been  sparingly  made,  that  is,  hardly  to  the  extent  demanded 
by  increased  traffic.  The  general  increase  of  traffic  has  made  it 
imperative  to  undertake  a  number  of  improvements  of  a  pressing 
nature  at  once,  and  Southern  Pacific  stands  ready,  if  this  applica- 
tion for  temporary  lease  of  Central  Pacific  be  granted,  to  advance 


the  money  at  once,  as  the  Central  Pacific  itself,  with  its  poor 
credit,  cannot  obtain  it,  in  order  to  provide  enlarged  and  more 
modern  facilities  at  various  points,  including  stations  at  Sacra- 
mento and  Reno,  whose  requirements  have  outgrown  existing 
ones;  to  establish  enlarged  terminal  at  Dunsmuir;  substitute  the 
most  substantial  ballast  for  that  now  under  the  ties  on  parts  of  the 
line  where  necessary ;  to  start  the  construction  of  second  tracks  on 
parts  of  the  Central  Pacific  line  where  such  construction  will 
facilitate  the  prompt  movement  of  traffic,  such  as  certain  sections 
of  the  tracks  over  the  Sierra  Nevada  and  in  the  territory  where  the 
meeting  points  of  eastbound  passenger  trains  out  of  San  Francisco 
and  westbound  passenger  trains  into  San  Francisco  are  concen- 
trated. In  fine,  to  proceed  on  a  program  of  improvement  to  fully 
meet  the  requirements  of  existing  and  future  business.  The  Cen- 
tral Pacific  as  an  independent  company  has  no  credit  in  the  finan- 
cial markets  of  the  world.  If  separated  from  the  Southern  Pacific 
it  could  not  raise  the  capital  necessary  for  these  improvements  now 
needed  nor  the  huge  additional  amounts  required  solely  on  account 
of  separation  and  which  would  otherwise  be  unnecessary.  In  the 
settlement  of  its  debt  with  the  Government  of  the  United  States 
in  1899  the  guaranty  of  the  Southern  Pacific  as  to  both  principal 
and  interest  was  required  in  order  to  provide  for  settlement  of  said 
debt,  which  amounted  to  $58,820,000,  and  the  negotiation  of  bonds 
to  take  care  of  the  same,  and  also  for  refunding  and  construction 
purposes.  The  Southern  Pacific  likewise  had  to  guarantee 
$9,640,000  short  line  first  mortgage  bonds  to  finance  construction 
by  the  Central  Pacific  of  the  Lucin  cut-off.  The  last  loan  nego- 
tiated for  the  benefit  of  the  Central  Pacific  was  its  European  Loan 
of  1911,  which  was  negotiated  solely  upon  the  basis,  first,  of  its 
guaranty  as  to  principal  and  interest  by  the  Southern  Pacific,  and 
second,  by  a  pledge  of  $83,985,800  of  the  liquid  assets  of  the  South- 
ern Pacific  Company  represented  by  stocks  and  bonds  in  other 
companies,  which  are  the  only  tangible  securities  back  of  this  loan. 


CENTRAL  PACIFIC  RAILWAY  COMPANY 

Funded  debt  outstanding  December  31,  1921,  guaranteed 
by  Southern  Pacific  Company 

Guaranteed  by 

Total  Southern  Pacific 

Title  of  Bonds  Outstanding  Company 

First  refunding  mortgage,  4% $98 , 718 , 000  Principal  and  interest 

Three  and  one-half  per  cent  mortgage 

3^% 6,617,325  Principal  and  interest 

Through  Short   Line  First   Mortgage 

4% 9,640,000  Principal  and  interest 

Four  Per  Cent  35  year  European  Loan, 

(payable  in  French  Francs) (fcs.  83 ,922 ,000) 

$16 , 201 , 158  Principal  and  interest 

(payable  in  U.  S.  Gold) *. $32 ,061 ,358  Principal  and  interest 

Total $163,237,841 

8 


"The  total  $163,237,841  funded  debt  guaranteed  by  Southern 
Pacific  Company  is  89%  of  the  total  funded  debt  of  the  Central 
Pacific  and  shows  how  seriously  the  Southern  Pacific  would  be 
crippled  by  a  temporary  separation  even,  pending  the  determin- 
ation by  the  Commission  of  the  final  allocation  of  the  Central 
Pacific  in  its  consolidation  plan,  because  the  Southern  Pacific  would 
lose  the  large  contribution  to  its  net  income  made  by  the  Central 
Pacific  and  in  addition  would  remain  burdened  with  the  obligation 
to  make  good  its  guarantee  of  the  interest  on  $163,237,841  of 
funded  debt.  The  Central  Pacific  is  today  bonded  at  the  rate  of 
of  $80,000  per  mile.  Its  balance  sheet  as  of  July  31,  1922 — exhibit 
15  attached  to  the  petition— shows  outstanding  capital  stock 
$84,675,000,  outstanding  funded  debt  $183,083,841.20,  total  out- 
standing securities  being,  therefore,  $26,758,  841.20;  ratio  of  bonds 
to  total  capital  being  already  68.4%,  a  percentage  which,  in  the 
opinion  of  bankers,  is  unsafe  and  it  should  not  exceed  60%  and 
therefore  is  not  an  attractive  security  for  the  investor.  An  inde- 
pendent Central  Pacific  would  therefore  be  unable  to  finance 
either  these  improvements  which  will  be  required,  if  unified  control 
continues,  or  those  additional  and  unnecessary  improvements 
required  in  the  event  of  separation.  The  public  would  therefore 
have  the  service  of  an  impoverished  line  operating  at  a  disadvan- 
tage and  incapable  of  making  improvements  now  needed  or  of  keep- 
ing pace  with  the  growing  needs  of  the  country. 

"Central  Pacific  contributes  25.4%  to  the  total  income  of  the 
Southern  Pacific  System,  that  is  $9,143,251,  out  of  $35,946,291. 
The  Southern  Pacific  Company's  net  income  is  used  for  payment 
of  fixed  charges,  additions  and  betterments,  and  for  the  payment 
of  guarantees  on  bonds  of  its  constituent  or  related  companies. 
On  July  31,  1922  the  amount  of  such  bonds  guaranteed  by  it  as  to 
principal  and  interest  was  $401,000,000  and  in  addition  $4,479,000 
of  outstanding  bonds  have  been  guaranteed  as  to  interest  only. 
The  annual  interest  on  these  guaranteed  bonds  amounts  to  $17,400,- 
000.  It  is  patent,  therefore  that  if  deprived  of  the  net  income 
contributed  by  the  Central  Pacific,  the  Southern  Pacific  would 
be  in  position  where  it  might  have  to  default  on  some  of  its  obli- 
gations incurred  in  building  up  a  transportation  system  designed 
to  give  to  the  public  the  most  efficient  possible  service. 

"We  have  forecasted  in  considerable  detail  the  extent  of 
impairment  and  disarrangement  of  service,  which  would  follow 
the  destruction  of  a  unified  system,  where  operating  methods  and 
business  policies  have  been  developed  during  50  years  of  steady 
growth.  Having  entered  the  service  of  Southern  Pacific  Lines  in 
1878  and  having  therefore  acquired  a  most  intimate  familiarity 
with  the  growth  of  the  system  in  44  years  of  service,  I  am  peculiarly 
well  qualified — perhaps  better  than  anyone  now  living — to  indicate 
the  many  influences  that  have  contributed  through  the  inter- 
dependent use  of  all  its  lines  to  the  great  operating  efficiency  of 
Southern  Pacific  that  is  equalled  by  few  and  exceeded  by  no  system 
in  the  United  States.  Nevertheless,  it  manifestly  would  be 

9 


impossible  for  me  to  enumerate  all  of  the  favorable  conditions 
brought  about  by  unified  control  and  management,  or  all  of  the 
unfavorable  ones  that  would  be  created  by  dismemberment.  It 
stands  to  reason,  however,  that  in  dealing  with  the  proposed  des- 
truction of  organizations  and  methods,  which  it  has  required  half 
a  century  to  create,  no  mortal  being  can  possibly  trace  the  effect 
of  their  sudden  destruction  to  its  conclusions;  but  we  believe  we 
have  specialized  enough  in  indicating  evil  effects  so  as  to  make  it 
apparent  to  anyone  that  substitute  methods  and  organizations, 
untried  by  time  or  experience,  cannot  possibly  operate  as  efficiently 
or  smoothly  as  that  which  now  exist.  It  would  seem  to  be  folly  to 
disrupt  relations  that  have  developed  in  50  years  of  experience  in 
operating  these  properties  unifiedly  in  order  to  make  such  a 
doubtful  experiment  pending  the  determination  of  consolidation 
proceedings,  wherein,  under  plans  now  before  the  Commission, 
the  retention  of  these  lines  as  part  of  a  single  system  is  contem- 
plated." 


10 


Cross  Examination 

On  cross  examination  Mr.  Kruttschnitt  referred  to  the  fol- 
lowing statements  made  by  Union  Pacific  "propagandists"  in 
urging  the  tearing  from  the  Southern  Pacific  System  of  lines  in 
the  corporate  name  of  Central  Pacific: 

(A)  The  separation  "would  make  every  railroad  coming  into 
San  Francisco  stand  on  its  toes  as  to  business  efficiency." 

(B)  "All  major  improvements  were  put  in  under  Union 
Pacific  control." 

(C)  Southern  Pacific  "a  corporation  that  has  never  built  up 
your  territory."  Union  Pacific  control  of  Central  Pacific  "would 
force  development  of  every  kind  through  the  entire  territory." 

Regarding  these  statements  Mr.  Kruttschnitt  said  : 

"In  1921  the  following  data  established  the  relative  'business 
efficiencies'  of  Southern  Pacific  and  Union  Pacific.  Remember  that 
Union  Pacific's  main  line  is  substantially  all  double-tracked  with 
curvature  and  grade  rates  much  lighter  than  on  Southern  Pacific 
whose  long,  steep  grades,  combined  with  sharp  curves,  over  the 
Sierra  Nevada,  Siskiyou  and  Tehachapi  Mountains,  probably 
present  the  most  difficult  operating  problems  in  the  world  on  heavy 
traffic  lines.  Notwithstanding  the  handicaps  we  have  mentioned, 
Southern  Pacific  freight  locomotives  made  8.82%  more  mileage 
daily  than  did  those  of  Union  Pacific. 

"Southern  Pacific  passenger  locomotives  ran  9^%  more 
miles  daily  than  did  those  on  Union  Pacific,  with  30%  more  pas- 
sengers per  train,  suburban  passengers  excluded. 

Notwithstanding  lighter  grades,   Union   Pacific  consumed 
more  fuel  to  move  the  same  number  of  ton  miles. 

"Notwithstanding  lighter  grades,  Union  Pacific  burned  17% 
more  fuel  to  move  the  same  number  of  passenger  car  miles.  South- 
ern Pacific's  equation  of  oil  to  coal  such  as  Union  Pacific  uses, 
gives  the  coal  4%  advantage  over  oil. 

"Proceeding  a  step  further,  the  regularity  of  movement  of 
traffic,  passenger  and  freight,  through  Ogden,  shows  the  superiority 
of  service  rendered  the  public  by  Southern  Pacific  over  Union 
Pacific. 

Percentage  of  on  time  deliveries  of  trains  at  Ogden. 

Passenger  Trains 

1921  6  MOS.  IQ22 

By  Southern  Pacific  ............................     93.9%  91.4% 

By  Union  Pacific  ...............................     73.2%  80.3% 


Manifest  Freight  Trains 
By  Union  Pacific  ...............................     79.2%  88. 


By  Southern  Pacific  ............................     91.1%  96.1% 

.0% 


Perishable   Freight    Trains 

between  Roseville,  California,  and  Council  Bluffs,  Iowa,  made 
schedule  time  over  Southern  Pacific-Union  Pacific,  thus: 

1921         6  Mos.  1922 
By  Southern  Pacific  ............................       90%  94% 

By  Union  Pacific  .............................  .  .       60%  50% 

11 


"The  movements  over  Southern  Pacific  being  on  single  track 
and  on  Union  Pacific  on  double  track  with  sharp  curves  and  rates 
of  grade  very  much  against  Southern  Pacific. 

"During  the  shopmen's  strike,  Southern  Pacific  placed  em- 
bargoes on  livestock  and  perishables  for  but  two  periods  of  23 
and  44  hours  respectively,  and  annulled  no  passenger  trains.  Union 
Pacific  embargoed  livestock  and  perishables  at  all  California 
junctions  for  six  days  and  were  unable  to  move  passenger  trains  for 
four  days,  on  which  Southern  Pacific  assisted  them  by  handling 
their  passengers  to  destination.  For  several  days  during  the  strike 
the  Southern  Pacific  Lines  afforded  the  public  the  only  means  to 
move  freight  and  passengers  by  rail  out  of  California.  In  face  of 
these  tests  of  efficient  organizations  and  management,  much 
superior  to  those  of  its  covetous  traducer,  not  only  it  would  not 
benefit  but  it  would  inflict  great  and  injustifiable  injury  on  the 
public  to  lower  the  excellence  of  its  service  by  turning  any  part  of 
the  Southern  Pacific  System  over  to  the  Union  Pacific." 

Referring  to  the  charge  "all  major  improvements  were  put  in 
under  Union  Pacific  control,"  Mr.  Kruttschnitt  said: 

"Union  Pacific  acquired  control  of  Southern  Pacific  in  1901. 
Ten  years  preceding  1901  covered  a  period  of  financial  trouble  for 
the  railroads.  The  return  on  book  cost  of  all  railroads  in  the  United 
States  in  that  period  averaged  but  5.7  percent.  For  the  ten  years 
ending  in  1 9 1 0  the  average  was  5 . 2  percent .  Added  to  this  country- 
wide trouble  the  Southern  Pacific  had  peculiar  troubles  of  its  own 
in  negotiating  the  settlement  of  the  Central  Pacific  debt  of  some 
$58,812,715  to  the  United  States  Government.  The  negotiations, 
which  were  completed  in  August,  1899,  were  a  cloud  on  the  South- 
ern Pacific's  financial  horizon  which  made  large  expenditures  on 
long  desired  and  fully  matured  plans  impossible.  It  was  impracti- 
cable to  raise  large  sums  of  money  on  poor  credit  of  the  Southern 
Pacific  Company.  A  review  of  the  status  of  "major  improve- 
ments" preceding  and  during  Union  Pacific  control  will  test  the 
correctness  of  the  charge  of  our  critics. 

"(1)  Complete  plans  and  specifications  for  rebuilding  Central 
Pacific,  including  those  for  constructing  the  Lucin  cut-off — which 
was  a  dream  of  Mr.  C.  P.  Huntington's  for  over  25  years — had 
been  prepared  by  Southern  Pacific  engineers  long  before  Union 
Pacific  acquired  control,  but  were  held  in  suspense  because,  among 
other  things,  the  unsettled  government  debt  affected  Southern 
Pacific  credit  and  made  it  difficult,  if  not  impossible,  to  raise  the 
needed  capital.  Soon  after  an  agreement  with  the  Government 
was  reached  Mr.  Huntington  died,  whereupon  Mr.  Harriman 
secured  control  of  Southern  Pacific  System  and  assumed  the 
Presidency.  About  eight  months  thereafter  I  was  appointed  his 
assistant,  with  headquarters  at  San  Francisco.  By  his  direction 
the  General  Manager  and  Chief  Engineer  of  the  Union  Pacific 
came  to  San  Francisco  for  conference  on  plans  of  the  Lucin  cut-off, 
and  on  rebuilding  550  miles  of  the  Central  Pacific  between  Ogden 
and  Reno.  Following  this  conference  Mr.  Hood,  Chief  Engineer 

12 


of  the  Southern  Pacific,  who  had  prepared  the  plans,  and  I,  were 
called  to  New  York  bringing  them  with  us.  After  two  short  con- 
ferences Mr.  Harriman  approved  them  without  any  changes  what- 
soever and  ordered  their  immediate  execution. 

"The  Union  Pacific  lent  its  credit  to  obtain  money  which 
Southern  Pacific  with  its  impaired  credit  was  unable  otherwise  to 
obtain,  and  made  possible  the  execution  of  work  which  had  been 
conceived  by  Southern  Pacific  officers  and  had  been  covered  in 
detailed  plans  and  specifications  long  before  Union  Pacific  acquired 
control  of  their  lines.  The  work  was  completed  by  Southern  Pacific 
officers  who  reported  direct  to  Mr.  Harriman  entirely  independ- 
ently of  Union  Pacific  officers. 

"(2)  The  Bay  Shore  cut-off,  or  low  grade  entrance  into  the 
City  of  San  Francisco,  was  completed  in  1907  but  the  credit  for  its 
conception  and,  indeed,  for  a  considerable  part  of  its  construction 
does  not  belong  to  Union  Pacific.  This  cut-off  diverges  from  the 
old  main  line  at  San  Bruno,  about  1 1  miles  south  of  San  Francisco 
and  follows  a  sea  level  grade  along  the  shores  of  San  Francisco  Bay 
to  the  terminals.  The  construction  of  this  line,  like  that  of  the 
Lucin  cut-off,  had  long  been  a  dream  of  Mr.  Huntington's,  and  we 
find  from  office  records  that  a  short  part  of  the  line  from  San  Bruno 
to  South  San  Francisco  was  completed  on  the  final  location  De- 
cember 31,  1892,  and  some  of  the  right  of  way  was  bought  as  far 
back  as  1878.  Other  purchases  of  right  of  way  were  made  in  1893 
and  thereafter  until  construction  was  actively  begun.  As  much  as 
$1,000,000  was  spent  in  the  acquisition  of  property  for  this  change 
in  the  year  ended  June  30,  1900,  and  $563,000  in  the  year  ended 
June,  1901,  all  of  the  expenditures  were  made  on  plans  perfected 
long  before  Union  Pacific  control. 

"(3)  Completion  and  opening  of  the  Coast  Line  from  San 
Francisco  to  Los  Angeles  via  Santa  Barbara,  Montalvo,  Chats- 
worth  and  Burbank : 

"The  long  unfinished  gap  of  107  miles  between  Ellwood  and 
San  Luis  Obispo  was  completed  in  January  1901.  The  construc- 
tion between  Montalvo,  via  Chatsworth,  and  Burbank,  substitut- 
ing a  low  grade  line  in  place  of  the  heavy  grades  via  Saugus  and 
the  San  Fernando  tunnel  was  completed  in  the  year  1900. 

"Thus  we  see  that  the  three  most  important  and  costly  'major 
improvements'  to  Southern  Pacific  property  were  all  conceived 
and  covered  by  complete  plans  and  specifications  long  before 
Union  Pacific  control,  although  the  completion  of  two  of  these 
improvements  was  unquestionably  hastened  by  Union  Pacific 
lending  its  credit  to  Southern  Pacific. 

"Shortly  after  the  Central  Pacific  reconstruction  was  finished 
Mr.  Harriman  who  by  his  wonderful  work  of  rehabilitating  the 
Union  Pacific  placed  himself  at  once  easily  at  the  head  of  great 
upbuilders  of  railroads,  determined  on  an  organization,  planned 
by  himself,  to  operate  both  Southern  and  Union  Pacific  Systems 
with  maximum  efficiency.  It  is  significant  that  every  man  he 
selected  for  the  highest  posts  and  vested  with  jurisdiction  over  the 

13 


combined  systems  which  embraced  the  greatest  mileage  ever 
operated  by  common  officers,  were  selected  from  the  Southern 
Pacific  staff. 

"Under  Mr.  Harriman's  directions  these  officers  introduced 
on  Union  Pacific  Lines,  Southern  Pacific  methods  and  practices, 
whose  excellence  had  been  proven  in  their  previous  positions,  and 
these  were  used  until  the  properties  were  unmerged  by  the  decree 
of  the  Supreme  Court  in  1913. 

"The  operating  data  for  1921,  which  we  have  quoted,  showing 
the  superiority  of  Southern  Pacific  'business  efficiency'  over  that 
of  Union  Pacific  vindicate  Mr.  Harriman's  opinions  of  the  com- 
parative efficiencies  of  the  management  of  the  two  systems,  and 
show  that  one  railroad  'coming  into  San  Francisco'  has  been  'stand- 
ing on  its  toes'  as  to  'business  efficiency'  high  enough  at  least,  to 
overtop  the  Union  Pacific." 


14 


